rofit of Rs70.8bn was higher than we expected due to lower exploration expenses and an inflow of gas pool arrears. We believe clarity on subsidy sharing and royalties on the Rajasthan block remain key unresolved issues before the planned divestment of government shares.

Results in line at EBIDTAX level
Earnings before interest, depreciation, tax and exploration expenses (EBITDAX) of Rs113.1bn (up 24% yoy) were in line with our expectations. Profit before tax at Rs105.5bn was higher than our estimate, mainly due to lower exploration expenses (which vary substantially qoq) and an inflow of gas pool arrears of Rs18.98bn. Crude production at 7.03mt (up 5.9% yoy) and subsidy payments were in line with our expectations. Crude sales volumes were lower than expected by 4% (inventory swing), partly compensated by higher gross realisations of around US$0.50/bbl. After considering subsidy, ONGC's net realisation on own crude was US$64.8/bbl compared with US$62.7/bbl in 2QFY11 and US$57.7/bbl in 3QFY10. This figure considers the sale of crude only from ONGC's nomination blocks and ignores sales of joint venture crude and oil products (which also benefit from rising oil prices).

Royalty, subsidy issues need to be resolved
Our estimates assume the Indian government (GOI) will reimburse ONGC the excess royalty (Rs8.3bn in 9m FY11) that it currently pays on the Rajasthan block (ONGC pays royalty for 100% share while it has a 30% stake). The one-third upstream subsidy sharing formula makes an implicit assumption that GOI will maintain 50-60% subsidy support, to which the finance ministry has been unwilling to commit, increasing the risk of a higher upstream subsidy share. For details on both issues, see our note Clarity before divestment?, dated 5 January 2011. ONGC did not comment on these issues due to the pending divestment.

Maintain Hold, target price of Rs1,300
Our earnings estimates are unchanged and we maintain our Hold rating. Our DCF-based target price of Rs1,300 assumes that oil realisations from ONGC's own domestic crude are capped at US$60/bbl to reflect the uncertainty on subsidy sharing (average realisation in 9MFY11 was lower at US$58.72/bbl).